The Bush Era Tax Cuts Didn't Create The Wealth They Were Supposed To

The Republican Party has long promoted itself as the party of
business.

Republicans understand the needs of business, we are told, and if
the country would leave the economy in their hands business would
boom.

All we need to do is to give those at the very top of the income
distribution – the “job creators” – more income through tax
breaks, and then sit back and wait for the magic happen.

Our investment in the wealthy will produce remarkable economic
growth, and everyone will be better off.

The Bush tax cuts were a test of these claims about supply-side
economic policies. To justify the tax cuts the nation was, in
effect, given a business prospectus from the Republican Party.

We were promised that cutting taxes on the wealthy would result
in much higher economic growth and broadly shared prosperity. For
those who wondered how we would pay for such a large cut to the
government’s revenue stream, the Republican prospectus had a
remarkable claim.

The tax cuts wouldn’t cost us anything. Growth would be so strong
that the tax cuts would more than pay for themselves. Even those
who admitted that the tax cuts might not be fully self-financing
still made strong claims about faster economic growth offsetting
much of the lost revenue from the tax cuts.

The reality, of course, has been quite different. There is
little evidence that the Bush tax cuts, or
any other tax cuts directed at the so-called job creators, have
had a noticeable effect on economic growth. And the promise of
broadly shared prosperity has not been realized.

Most of the gains from economic growth in recent decades have
gone to the top of the income distribution while the inflation
adjusted wages of the working class have been relatively flat.
Furthermore, the tax cuts have not paid for themselves as
promised, and it hasn’t even been close. The Bush tax cuts have
already cost us trillions in revenue, and if they are extended
for high income tax payers, they will cost us roughly another trillion over the next decade.

The failure of Republicans to deliver on their promise that tax
cuts would be mostly self-financing is a large factor in the
deterioration in our long-run fiscal outlook, and it is putting
considerable pressure on programs such as Social Security. In
fact, the Bush tax cuts can be thought of as a loan from the
Social Security Trust Fund that was supposed to be paid back with
the revenues from higher economic growth, a loan that is
presently in default.

To see this, recall that the government began intentionally
collecting a surplus from the Social Security program beginning
in 1983 in order to prefund the retirement needs of baby boomers.
The idea was to run a surplus for several decades while the
baby-boomers were still working to get ready for the deficit
years the system would experience after they retired.

The revenue from Social Security over and above what was needed
to fund payouts reduced the overall government debt and allowed
taxes to be lower than they could have been without these
surplus funds. For example, the surplus that
Bush inherited from the Clinton administration was largely due to
the Social Security Trust Fund, and Bush argued it would be
better to give this surplus to the private sector through tax
cuts than to leave it in the hands of the government.

But it wasn’t better. The income of the wealthy grew as they
pocketed the tax cuts, but workers experienced stagnant wages, a
recession that hit working class households particularly hard,
and intense pressure to cut important social programs.

Despite their failed promises, the Republican Party is asking
that we extend the tax cuts for the wealthy, and some are even
calling for further reductions in tax rates.

However, if the Republican Party is truly the party of business,
then surely it will understand that no responsible financial
institution would continue to invest in a business that failed
meet, or even come close to the growth and revenue projections
that justified the investment in the first place.

The payoffs from tax cuts that were promised during the Bush
years have not been realized, and the failed promises about
growth and revenue have damaged the health, education, and
retirement programs the working class depends upon in our
increasingly globalized economy.

A true party of business would end our investment in the false
promise of supply-side economics. However, a party with a goal of
reducing the scale of programs such as Social Security and
Medicare along with delivering tax cuts to wealthy political
backers would use arguments about the economic effects of tax
cuts to disguise its true intentions.

Which description fits best? Many Republicans still claim that
tax cuts for the wealthy enhance economic growth despite the
evidence to the contrary, but it’s rare to hear a Republican
admit that these supply-side policies have failed.